The term “Cryptocurrency” has shot to fame over recent years, with it being used across a wide range of sectors throughout the globe. The currency is “decentralized” as it isn’t managed by a particular individual as is with banks.
The buzzword was identified as a trend that had the potential to totally change global finance as we knew it. It also started to become a significant investment opportunity for firms and individuals wanting to update how their portfolio is returning the value.
A cryptocurrency is a 100% digital currency that is also referred to as coins or tokens. This form of trading can come in various forms, most commonly these are known as Bitcoin, Ethereum & Litecoin.
Crypto & Tax: An introduction
The relationship between Crypto & Tax has not always been a harmonious one. The fact that crypto is decentralized still means that there are tax implications for the currency to adhere to. In 2014 the IRS classified cryptocurrency as a “property” rather than a “currency”, therefore this meant that the digital currency is taxed in the same way as other similar high-value assets such as stocks or gold.
Without surprise, the interpretation of the two topics is still not as simple as that and there has been some confusion about how exactly crypto is taxed. For those who do invest in this virtual currency, it is vital to totally understand the tax regulations, and what events are taxable and what aren’t.
When isn’t crypto taxable?
In this section, we will be addressing the moment at which crypto isn’t taxable. When a cryptocurrency is purchased with dollars and keeping it within the same exchange currency that it was initially purchased in ensures that the currency does not need to be taxed. On top of that, if the cryptocurrency is transferred to a personal wallet then it also means it is exempt from tax.
Another circumstance in which crypto avoids tax is when it is gifted from one individual to another. This however is only the case when the amount of crypto is worth less than $16,000 based on the fair market value on the day it is gifted. Another time when crypto is tax-free is when it is donated to a tax-exempt organization, this falls into a similar box as it does with the gifting element.
If you or any organization are involved with a cryptocurrency in these situations, then there is no need to declare the activity to the IRS.
When is crypto taxable?
The tax regulations around when crypto is taxable are slightly more confusing. The two different types of tax are split between “capital gains” & income tax.
Ever since the IRS classified crypto as property, it means that crypto is now subject to capital gains tax, which essentially means that when you make money from crypto a tax is added. It is added in three scenarios, these being: when the individual is either trading for swapping crypto for crypto, selling crypto for dollars or using crypto to buy things for personal use. These activities can create taxable events.
This form of tax can then be divided into short-term and long-term, this is to facilitate longer-term investments. People who choose long-term investments seem to be at an advantage in comparison to those who are owners of short-term crypto investments. This is mainly due to the fact that they are subject to incentives and lesser tax rates.
This being said, any losses that are had can be claimed back in circumstances. If crypto is then sold at a loss, this can be taken off any other income tax that is applicable, however, this is only up to $3,000 per year. Having awareness of this regulation will give investors further capital they may not have been aware they could claim!
A simple way to get your head around the difference between Capital Gains & Income tax is that if the crypto that you own is increasing in value, then you are subject to tax. It is very important that all investors realize these scenarios can sometimes be seen as a freebie, however, must still be recorded as a taxable event to the IRS.
These include getting paid in the form of crypto, this will then mean that you will be taxed with regards to the bracket of tax you fall into. Another time in which income tax may affect your portfolio is when crypto is mined (both as a business or a hobby) however in this scenario, the business is subject to self-employment tax.
Where Vine comes in
Understanding crypto and the implications that come with it can be a daunting task. Here at Vine Advisors, our aim is to ensure that we provide you with all the necessary information so you can learn more about how exciting the technology and financial rewards can be in such a rapidly changing and sometimes unclear area.
We have experts in this field and with this will strive to give you the very best service, getting deep down into what exactly fuels the crypto market and how you can be best suited to achieve it.